Lowe’s Stock: Attractive long-term choice

lowes (LOW) has been a popular investment choice for many years while boasting a respectable track record of growth and business resilience.

Dividends and consistent buybacks have also been part of the stock’s case. I’m optimistic about Lowe’s.

business resilience

Lowe’s has been in business in the United States for a very long time and is delivering excellent shareholder returns while growing its well-known business.

Most of the products the company offers require customers to be in the store more than other retail and even wholesale product categories. In the sense that the growing e-commerce trend could negatively impact sales of any traditional, established consumer discretionary company, Lowe’s should be one of the companies showing resilience.

With inflated home prices, more and more consumers are turning to home improvement projects. In addition, rising borrowing costs to buy a property should encourage homeowners to resort to renovations of properties they already own.

On the other hand, building materials are subject to severe inflationary pressures, also caused by supply chain disruptions, threatening the affordability of Lowe’s products.

Despite its mature profile, Lowe’s still has a respectable growth record. Over the past five years, revenue has grown by an 8.1% CAGR to $96.2 billion in January 2022, while net income has grown by an even more impressive 22.2% CAGR to $8.4 billion.

Analysts expect the company to hit the $100 billion milestone in the next few years.

As a result, gross profit margins have also improved, although they are still relatively below the 10-year average level. The company reported a gross margin of 33.3% for fiscal 2021. However, LOW’s net margin is looking better, at a 10-year high (8.7%).

Cash flow generation has been consistently strong, with cash flow from operations increasing from $5.6 billion in 2017 to $10.1 billion in 2021 (15.9% CAGR).

Return on capital has also increased from 17.2% in 2017 to 29.3% in 2021, helped by management’s shareholder-friendly dividend and share buyback strategy.

Dividend Consistency & Buybacks

Lowe’s has been a safe haven for dividend growth investors for many years, and with good reason. While its current yield of 1.6% isn’t anything special, it’s its consistency in growth and payments that set Lowe’s apart as a top dividend pick.

The company’s earnings distribution has grown for over 50 straight years and has shown exceptional resilience while navigating through multiple recessions and economic downturns.

Lowe’s is one of the few “dividend kings” in the US stock market. Over the past five years, dividends have grown at an impressive 18% CAGR, outpacing the sector’s 8.6% compound annual growth rate.

Ten-year growth is even higher at 19% CAGR. Given its dividend performance, it’s fair to laud the stock as an important addition to a portfolio in terms of battling inflationary pressures.

Shareholder value increases are also derived from a consistent record of share buybacks. Lowe’s average share count has declined from 1.15 billion shares in 2013 to 700 million in 2021, representing a significant decline and consequent increase in shareholder value.

The home depot alternative

Probably one of the most thought-out and debated comparisons between competing companies is the one about Home Depot (HD) and Lowes. While plenty of analysis from various analysts is readily available, most tend to conclude that Home Depot is relatively superior when it comes to financial performance.

In summary, for Home Depot we should see a higher dividend yield of 2.5% compared to LOW’s offerings which yield 1.6%, Home Depot’s marginally higher five-year CAGR of 9.8% (8.2% for LOW) and mention a broader net margin of 10.9%. (8.8% for LOW). Additionally, analysts often tend to point to HD’s larger market share and its advantage in sales per store.

However, a quick look at both companies’ valuations will show that any benefit Home Depot retains is actually already priced in. To be more specific, HD is trading at a P/E of 19.8, while LOW is trading at a 17x multiple.

The premium implied by the HD rating might even seem a bit excessive given the narrow range of differences between the companies. Price-to-sales ratios suggest a similar conclusion, with Home Depot showing a 2.1x P/S multiple versus LOW’s 1.5x.

While the valuation range is obvious when looking at P/E’s over a five or even 10 year horizon, it’s currently at above average levels, suggesting that perhaps even from a trading perspective the risk/reward ratio suggests Lowes is attractive .

Given the impact valuations can have on long-term performance, it’s important to note that Lowe’s has slightly outperformed Home Depot over the past decade (654% vs. 644% total return). The outperformance was even greater over the past five years, with LOW returning 170% compared to 125% for HD.

Take Wall Street

As for Wall Street, Lowe’s has a strong buy consensus
Rating based on nine buys, three holds and zero sells assigned in the last three
Months.

Lowe’s average target price is $259.18, up 24.4% from current price levels, with a high forecast of $292 and a low forecast of $190.

Conclusion

Lowe’s has been, and likely will remain, a safe long-term choice for investors. Good financial metrics are also supported by management’s focus on increasing shareholder value.

After some significant YTD losses amid the market decline, Lowe’s appears attractively valued

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